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ATTRACTING ECONOMIC GROWTH FOR THE

RURAL ECONOMY

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC, SEPTEMBER 4, 2003

Serial No. 108–35

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

FRANK BALLANCE, North Carolina 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

CHARLES GONZALEZ, Texas 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

ENI FALEOMAVAEGA, American Samoa 

BRAD MILLER, North Carolina 

J. MATTHEW SZYMANSKI, Chief of Staff and Chief Counsel 

PHIL ESKELAND, Policy Director 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Dorr, Thomas C., U.S. Department of Agriculture ............................................... 4

Sampson, David A., U.S. Department of Commerce ............................................. 6

Drabenstott, Mark, Federal Reserve Bank of Kansas City .................................. 8

Ungar, Bernard L., U.S. General Accounting Office ............................................. 10

Freshwater, David, University of Kentucky .......................................................... 12

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 28

Velazquez, Hon. Nydia ..................................................................................... 30

Prepared statements: 

Dorr, Thomas C. ............................................................................................... 41

Sampson, David A. ........................................................................................... 48

Drabenstott, Mark ............................................................................................ 60

Ungar, Bernard L. ............................................................................................ 83

Freshwater, David ............................................................................................ 101

(III) 

(1)

HEARING ON ATTRACTING ECONOMIC 

GROWTH FOR THE RURAL ECONOMY 

THURSDAY, SEPTEMBER 4, 2003

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, D.C. 

The Committee met, pursuant to call, at 9:30 a.m., in Room 

2360, Rayburn House Office Building, Hon. Donald A. Manzullo 

[chair of the Committee] presiding. 

Chairman MANZULLO. Good morning, and welcome to this hearing by the House Committee on Small Business. I appreciate the 

participation by all who have come to us today, especially those of 

you that have traveled some distance to attend our hearing. 

The purpose of the hearing is to examine—review how the government is doing in encouraging growth in our rural economy. For 

many years, we have had a migration of people away from rural 

areas in general and towards metropolitan areas, especially metropolitan areas around the East and West Coasts. 

One contributing factor in the migration within the country is insufficient economic activity in rural areas. When rural areas lose 

working-age people, many schools and hospitals begin to shut 

down. Housing prices drop, the tax base erodes, social services have 

to be cut; and it creates an atmosphere that tempts more people 

to leave, and then the cycle is reinforced. All the investments in 

roads, railways, airports, telecommunications and utilities become 

underutilized and, to a degree, wasted. 

At the same time, the metropolitan areas these people move to 

have problems with too much road traffic, crowded schools and 

housing shortages. 

For example, there have been cuts at the Goodyear Tire factory 

and Honeywell electrical switch facility in Freeport, Illinois, and 

nearby Galena; and the General Electric plant in Morrison, Illinois, 

in Whiteside County, which is part of the district that I represent, 

has gone from a couple of thousand employees down to 200. 

When these larger factories shed jobs, many other small businesses are affected, some of which obviously close. And then some 

of the former employees have to move out of these rural areas to 

find new work, which put houses on the market for sale. The smaller work force hurts the property tax base and it goes on and on. 

In fact, there was an article in the Washington Post on Sunday 

about a town by the name of West Point, Nebraska, that suffered, 

along with most of our rural areas where we are actually losing 

population, the challenge that it has with the wave of new immiVerDate 0ct 09 2002 11:49 Apr 06, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\HEARINGS\92798.TXT NANCY
2

grants repopulating the rural areas. All those challenges have really helped out that little town. 

Congress recognized the important of maintaining our rural 

areas when it passed the Rural Development Act in 1972. Today, 

we will have a hearing and testimony on whether the government 

agencies are living up to the goals of that law. 

We will also be hearing testimony on all the factors involved in 

creating the environment businesses need to thrive in rural areas. 

The recommendations we hear today will be important ones for developing any necessary future legislation to address critical problems. 

A further purpose of today’s hearing is to give the rural folks an 

opportunity to tout the fine things that they have done and no one 

knows about. That is why this is really not—it is not an oversight 

hearing, but it is a hearing that you can let the members of this 

committee, many of whom come from rural areas, and the delegates—we have four delegates that sit on this committee, which is 

extraordinary, and they, of course, are very much interested in economic development in their areas. So we are really thrilled to have 

what I consider a quite unique panel of people coming to help with 

us this issue. 

The rules are, try to keep the testimony to 5 minutes, more or 

less, such as when you buy a farm, 160 more or less. And we anticipate that we are going to have a very interesting hearing. Now, I 

will have to admit the first two witnesses have been out—or Mr. 

Dorr was on his way to our district last week on two very sizable 

projects, but had to deliver the money without me. And Mr. Sampson was out, what, about a month ago? 

Mr. SAMPSON. A month ago. 

Chairman MANZULLO. About a month ago with a nice check from 

the Economic Development Administration where we worked with 

the City of Rochelle and Union Pacific to put in the largest intermodal hub in the United States. That is, in terms of the footprint, 

EDA made possible a huge, huge light of promise in an area where 

we are into double-digit unemployment. 

So we look forward to the testimony. 

[Mr. Manzullo’s statement may be found in the appendix.] 

Chairman MANZULLO. And now I defer to and recognize our 

ranking minority member, Mrs. Velazquez, back from a nice break 

and looking refreshed. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Good morning. 

This committee has said time and time again, small business is 

big business in America. Nowhere is this truer than in rural America. From family farms to local restaurants to manufacturing, small 

businesses make up the bulk of the rural economy. Ninety percent 

of all businesses in rural areas are small firms, so when this committee examines policies that can impact small business, we are 

looking at policies that have a huge impact on rural America. 

Today, entrepreneurs in rural areas are facing hardships. They 

face a weakening labor pool, as a younger and more productive 

population decides to leave and look for opportunity elsewhere. 

They have less access to capital and fewer government loan programs that reach them. These issues are a threat to the livelihood 

of rural America, and for those entrepreneurs and their employees 

3

who struggle to survive in these communities the rewards of success are few. 

During the 1990s economic boom other small firms experienced 

far greater growth. And today, workers’ salaries in rural small 

businesses are nearly 35 percent below those found in cities. 

Small firms in these communities are also adjusting to the 

changing face of the rural economy. At one time, when Congress 

talked about rural development, we talked about farm policy. 

Today, only 10 percent of employment in rural areas is related to 

agriculture. In fact, the largest employers in rural America are 

manufacturing companies. These communities are often dependent 

on a single manufacturing plant as it brings in high-paying jobs 

that form the area’s economic and employment backbone. The loss 

of such companies can have a devastating effect. 

These areas have also been particularly hard hit by the dramatic 

decline in manufacturing jobs. Rural manufacturing fell by 4.6 percent in 2002, and the numbers are getting worse. The loss of these 

jobs has created a ripple effect and hurt other small businesses as 

well. 

Today’s hearings will address how we can solve these problems. 

We will look at ways that we can use government programs to ensure the future is bright in rural America. Congress needs to make 

sure that we are not cutting critical funding to entrepreneurial programs during this economic downturn. It is during times like this 

that small businesses can spur a recovery. 

The administration cannot continually turn its back on small 

businesses, particularly in rural America. They need help in overcoming the challenges that face them, like gaining access to capital, 

technical assistance and Federal contracts. The USDA and Department of Commerce need to make sure that the programs are reaching those businesses most in need. 

These small firms simply need the right tools to level the playing 

field and be competitive in an ever-changing economic environment. Yet the administration’s policies are actually hindering entrepreneurial development in rural areas, and because of policies 

that failed to help small firms, many rural businesses and our Nation’s family farms are being threatened. 

Small firms provide employment opportunities within these rural 

communities, but they cannot reach their full economic potential 

unless we provide them with the relief and assistance they need. 

As a key driver of our economy, small businesses require the working climate conducive to providing jobs to those living in rural 

areas. A high unemployment market in these small communities 

will cause workers and their families to leave and settle in more 

populated areas. 

Failed policies are harming communities that rely most on their 

small firms. This is what is happening in our Nation’s rural areas. 

We must prevent this in the future and examine ways in which 

Federal agencies can improve the programs to meet the needs of 

entrepreneurs in rural areas. Not only are small businesses the 

backbone of rural communities, they are the engine of our Nation’s 

economy. 

Thank you, Mr. Chairman. 

[Ms. Velazquez’s statement may be found in the appendix.] 

4

Chairman MANZULLO. Okay. We will start with Thomas C. Dorr, 

Under Secretary for Rural Development, the U.S. Department of 

Agriculture, from the State of Iowa, where—did you live in Mr. 

King’s district at one time? 

Mr. DORR. I still live in Mr. King’s district. 

Chairman MANZULLO. Oh, okay. You have a constituent here. 

That is great. 

Okay, we look forward to your testimony. 

Mr. DORR. Thank you. 

Chairman MANZULLO. The complete testimony, written testimonies of all the witnesses, will be made part of the record. 

STATEMENT OF THOMAS C. DORR, UNDER SECRETARY FOR 

RURAL DEVELOPMENT, U.S. DEPARTMENT OF AGRICULTURE 

Mr. DORR. Thank you, Mr. Chairman, fellow members of the 

committee, and particularly Congressman King. It is good to see 

you again. I would like to thank all of you for inviting me to testify 

on USDA’s Rural Development capital investment efforts under 

way to create economic opportunities in rural America, opportunities that I believe give rural Americans greater control over where 

they will live, work and raise their families as well as allow them 

to enjoy an improved overall quality of life. 

I think the question is, what is rural development at USDA. In 

fact, we are a sizable development bank. We presently have an $86 

billion portfolio of loans and we will administer nearly $16 billion 

in program loans, loan guarantees, and grants through our three 

primary service areas of Rural Housing Service, the Rural Utilities 

Service and the Rural Business-Cooperative Service. In effect, we 

are really a venture capital firm for rural America, and we have 

two basic goals, that is, to increase economic opportunity and to 

improve the quality of life for all rural Americans. 

How do we do this? We can increase economic opportunity by increasing the flow of capital to rural America, as well as provide 

leveraging opportunities. We are assisting in the sustaining and 

the rebuilding of the existing infrastructure in rural America. We 

are also involved in fostering and enhancing the build-out of the 

technological infrastructure necessary to enable rural America to 

compete both domestically and globally. And, in fact, we have implemented a $1.5 billion broadband loan and loan guarantee program as a result of our efforts this year; and finally, we are capitalizing on an emerging industry such as biomass and renewable resource development. 

It is this type of comprehensive approach of high tech investments and diversification of rural economies that led the Federal 

Reserve Bank of Philadelphia to highlight in its 2002 Summer/Fall 

Cascade publication as contributing to a 1 percent increase in employment in rural areas of Pennsylvania, while the State’s urban 

areas employment declined by 1 percent. And when you look at the 

impact such diversified investments are having in rural America, 

we expect in 2003 alone that through our programs approximately 

350,000 rural jobs will be created or saved. Our housing investments are estimated to create or save over 52,000 jobs. Our utilities and community infrastructure investments are estimated to 

create or save nearly 204,000 jobs, and our business investments 

5

through the Rural Business-Cooperative Service are estimated to 

create or save over 92,000 jobs. 

The impact of the Bush administration’s capital investments in 

rural America is tangible. According to USDA’s Economic Research 

Service, although the U.S. Economy is now in recovery, job growth 

is not what we would wish. For the Nation as a whole in 2002, unemployment rates increased and employment growth was sluggish. 

However, nonmetropolitan areas fared slightly better in each measurement than metropolitan areas, and in May of this year the Federal Reserve Bank of Kansas City, through whom—you will hear 

from its director shortly—through its Center for the Study of Rural 

America, noted that the rural economy continues to hold steady 

with rural job growth increasing slightly by seven-tenths of a percent in February, compared with a year earlier. It should be noted 

that job growth is increasing at a slightly higher percentage in 

rural areas compared to growth in metropolitan areas, according to 

the Bureau of Labor Statistics. 

A further illustration of this point is a recent Forbes Magazine 

article by Publisher Rich Karlgaard, who wrote in his monthly column, Digital Rules, a story entitled ‘‘Peaks and Valleys.’’ It focused 

on how the IPO market, which went from over 200-plus per year 

in late 1999–2000, dropped about 20 to 30 per year after the boom 

years of the late 1990s; and he discussed how, specifically, this has 

led to a level of high-quality talent being much less scarce and less 

likely to relocate to where the limited new markets are now being 

located. 

The connection for all of this to Rural Development is, in the second half of his article, which focused on Jonathan Weber, the 

founding editor of the Industry Standard, which was a must-read 

publication in the late 1990s if you were following the IPO market; 

and in a nutshell, when Weber’s magazine went out of business in 

2001, Weber was worn out having worked 70-hour weeks, chasing 

his tail and living in pricey San Francisco. 

He needed a change, and by his own account, needed to lower his 

cost of living. So he moved his family to his wife’s home town of 

Missoula, Montana, where he now lectures as an adjunct professor 

at the university, writes reports for Off the Record Research as an 

independent stock trader. 

The beauty of living in the 21st Century is that Weber and others like him can maintain the competitive edge of doing their job 

from rural areas while writing about international companies and 

global markets, and still reside in these rural regions that provide 

both a lower cost of living and an improved quality of life. 

My point is simply that technology and attractiveness of rural 

amenities are providing the tools to bring jobs to the people who 

choose to live in rural regions. Opportunities don’t have to go overseas. They can come to rural America. We are investing in the 

technological infrastructure and creating a venue and environment 

for companies and individuals to look beyond the traditional mindset and geographical limitations needed to be successful. 

As we look to future capital investments Mr. Chairman, we 

project that the more than $700 million in program level authority 

requested for fiscal year 2004 for our business programs alone will 

6

assist in creating or saving another 73,000 jobs and provide the financial assistance to more than 2,270 businesses and cooperatives. 

In our view, the rural economy is beginning to head in the right 

direction. President Bush’s initiatives on tax cuts, business growth 

and energy are all vital parts of this equation. 

We know we can’t relax. There is still much to be done, Mr. 

Chairman. We must be diligent in our efforts to create an economically healthy rural America. 

I do look forward to working with this committee on this effort. 

I will be happy to answer any questions you may have later on in 

this hearing. Thank you. 

[Mr. Dorr’s statement may be found in the appendix.] 

Chairman MANZULLO. Well, thank you. 

Let me introduce the members of our committee very briefly and 

give you an idea where they are from. Mr. King is from rural Iowa. 

Mr. Shuster has a lot of rural counties. Mr. Beauprez is from rural 

Colorado, Mrs. Velazquez is from an urban area, but she understands the issues of people that live in the country. Mr. Ballance 

is from rural North Carolina. Mr. Miller is from rural North Carolina. Mr. Case is from Hawaii, which is really mostly rural in terms 

of land mass. And I live outside of Egan, Illinois, a town of 39. My 

wife and I have a small cattle operation and so—Mr. Shuster. 

Mr. SHUSTER. Mr. Chairman, I would just like to point out that 

the district that I represent is all rural and, in fact, the most rural 

district in Pennsylvania; and we just had a plant closing 4 days 

ago, so this hearing is very timely, losing our manufacturing base 

in this country. 

So thank you for——. 

Chairman MANZULLO. Okay. We will talk about that afterwards. 

Mr. SHUSTER. Thank you. 

Chairman MANZULLO. Okay. Great. Well, now that you know 

who we are, we look forward to the—Mr. Sampson, the Assistant 

Secretary for Economic Development with the Economic Development Administration of the U.S. Department of Commerce. 

STATEMENT OF DAVID A. SAMPSON, ASSISTANT SECRETARY 

FOR ECONOMIC DEVELOPMENT, ECONOMIC DEVELOPMENT 

ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE 

Mr. SAMPSON. Chairman Manzullo, Ranking Member Velazquez, 

members of the committee, thank you for the opportunity to——. 

Chairman MANZULLO. David, could you pull the mike closer to 

you. 

Mr. SAMPSON. Certainly. 

Thank you for the opportunity to testify before you today on matters regarding rural economic development. It is a matter that is 

very close to my heart. 

I still own a cattle operation in north Texas; I know the challenges of rural America. Even though I have lived in town, in the 

Dallas-Fort Worth area, I have always said I had to do that to support my cattle. 

I have been with Mr. Beauprez in his district and Mr. Case in 

Hawaii, and I certainly have seen that our challenges in north 

Texas are not unique, but are replicated around the country. And 

certainly, Mr. Chairman, it is good to see you again. 

7

You have mentioned the opportunity I had to be with you and 

Speaker Hastert in Rochelle, Illinois, for the announcement of 

EDA’s $2.2 million investment in Rochelle to support the development of a truly world-class intermodal hub. This endeavor is an excellent example of how Federal and local governments can work together with the private sector, in this case the Union Pacific Railroad. This investment in Rochelle underscores EDA’s philosophy 

that we must leverage limited taxpayer resources to maximize return on taxpayer investment and private-sector job creation. The Rochelle investment, for example, will bring in $625 million 

in private capital investment in that rural area, and create at least 

400 higher-skill, higher-wage jobs, and will be a major economic 

driver for rural Illinois. 

I would like to focus on three main aspects of EDA’s agenda for 

advancing rural economic opportunity in the 21st Century. First, 

we believe that we must clearly understand what makes rural 

economies tick. Second, we believe that Federal economic development efforts should support strategies to advance regional competitiveness, innovation and entrepreneurship; and third, we believe it 

is important to work with our sister agencies to improve Federal 

coordination on rural economic development efforts. 

First, we must develop a better understanding of what makes 

rural economies tick. There is a very wide body of research on 

building regional economies, identifying the key components to 

building strong regional economies. And there is excellent research, 

as well as practical experience, on cluster-based economic development strategies, that have been extremely useful to EDA and other 

organizations whose mission it is to promote economic development. But most of that research and experience is in the context 

of more urbanized regions and settings. Unfortunately, the same 

level of knowledge regarding rural economies does not exist. 

EDA has made it a high priority in our research area to understand what makes rural economies tick. To accomplish this, we 

have partnered with world-class researchers, such as Professor Michael Porter of the Harvard Business School, the father of 

groundbreaking research and work on regional competitiveness 

strategies. 

We have also worked with the Council on Competitiveness, which 

has done excellent work focused on enhancing U.S. competitiveness 

by advancing policies that support innovation. And we are engaged 

in extensive work with my fellow panelist, Mark Drabenstott of the 

Kansas City Federal Reserve Bank’s Center for the Study of Rural 

America. We believe this is important because we can ill afford to 

throw taxpayer dollars at problems without knowing what marketbased strategies work to build strong, growing rural economies. 

While our research and collaborative efforts are ongoing, we have 

confirmed that a major difference in regional economic performance 

lies in a region’s capacity to innovate, regardless of whether that 

region is urban or rural. Transforming new ideas and new knowledge into high-quality products or services is the cornerstone of innovation and, therefore, competitiveness. 

Additionally, it is very important to understand that innovative 

activity is not limited to what we traditionally think of as the hightech sector. Every region in virtually every industry can leverage 

8

innovation to become more productive. And those of you who, like 

me, are involved in agriculture know that certainly that is a classic 

case of how embedding technology has truly transformed agricultural production. There are no inherently low-tech industries, only 

low-tech companies that have not yet fully and effectively applied 

technology. Deployment of technology intel communication networks and embedding technology into core business processes and 

industries, even if they are very old-line industries, can open new 

doors of economic opportunity in rural America. 

Research indicates that the capacity for regional innovation is 

driven by industry clusters—broad networks of companies, suppliers, service firms, academic institutions and organizations and 

related industries that together bring products or services to market. 

Now, clearly, clusters, business clusters and industry clusters in 

rural areas are going to look very different than in urban regions. 

But our research indicates that the promise and viability of developing business clusters in rural areas is very real. EDA asked Professor Porter and his team at Harvard——. 

Chairman MANZULLO. How are you doing on—I hate to interrupt 

somebody who just gave me a check for $2.2 million. 

Mr. SAMPSON. Not at all. 

Chairman MANZULLO. But how are you doing on time? We are 

about a minute over. 

Mr. SAMPSON. Okay. I can pause there and just end up by saying 

that we think the role of land grant universities is a very important, largely untapped factor in promoting rural competitiveness; 

and we look forward to working with the committee to develop 

strategies that will bring the many Federal agencies together to deploy all of our budgets in a much more direct way in an overarching strategy. 

Thank you, Mr. Chairman. 

[Mr. Sampson’s statement may be found in the appendix.] 

Chairman MANZULLO. Appreciate the opportunity. And thank 

you for your testimony. 

Chairman MANZULLO. Our next witness is Bernard Ungar—oh, 

I am sorry. I have got the wrong order here. It is Mark—is it 

Drabenstott? 

Mr. DRABENSTOTT. Drabenstott. 

Chairman MANZULLO. Mark Drabenstott, Vice President and Director, Center for the Study of Rural America, the Federal Reserve 

Bank of Kansas City. And we look forward to your testimony. 

STATEMENT OF MARK R. DRABENSTOTT, VICE PRESIDENT 

AND DIRECTOR, CENTER FOR THE STUDY OF RURAL AMERICA, FEDERAL RESERVE BANK OF KANSAS CITY 

Mr. DRABENSTOTT. Thank you, Mr. Chairman. And good morning, distinguished members of the committee. My name is Mark 

Drabenstott. I am Vice President and Director of the Center for the 

Study of Rural America at the Federal Reserve Bank of Kansas 

City. The Center is the focal point for research on rural economic 

issues in the Federal Reserve System. 

Small businesses have traditionally formed the images the Nation holds dear about the rural landscape—from the Chatterbox 

9

Cafe to Floyd’s Barber Shop. Entrepreneurs will have an even bigger impact on rural America’s future. 

Globalization has profoundly changed the industries on which 

the rural economy has relied. Rural America must now turn to a 

new frontier of economic opportunity, a promise that will only be 

realized if a new generation of entrepreneurs seizes it. 

Since the Rural Development Act of 1972, a lot has changed in 

the rural economy. As a result, new directions are needed for rural 

policy. New initiatives to help Main Street entrepreneurs grow will 

be a cornerstone of new rural policy. In that light, this committee’s 

discussion of rural issues is both timely and useful. 

Since the Rural Development Act of 1972, globalization and rapid 

technological change have redrawn the rural landscape. Agriculture’s role has diminished as fewer rural residents rely on farming. In 1972, agriculture was the leading source of income for 

roughly one in every four rural counties. Today, it is one in every 

ten. 

While rural areas still depend heavily on manufacturing, recent 

trends give reason for pause. Last year, for instance, 200 rural factories closed. Rural America’s claims to low-cost land and labor are 

being challenged by foreign competitors. Meanwhile, services are 

growing rapidly, but rural regions are struggling to seize high-skill 

service jobs that would lift rural incomes. Together, these trends 

reveal a rural economy where growth is highly uneven, and roughly 

six in every ten rural areas are looking for new economic engines. 

Fortunately, that quest for new rural growth is matched by a new 

horizon of opportunities. 

Many of these are enabled by new technologies or new economic 

processes. We think three stand out: product agriculture, tourism, 

and advanced manufacturing. Product agriculture opens new, higher-value options for farmers that extend well beyond bulk commodities. Pharmaceutical crops, the opportunity to grow pharmaceutical inputs in fields instead of factories, is the most exciting option, although uncertainties surround its outlook. 

Tourism offers a range of new opportunities from pheasant farming to linking regionally branded foods with unique heritage amenities. 

Finally, advanced manufacturing offers the opportunity to build 

clusters of small rural factories that can stay on the leading edge 

of technology. 

What policies are best suited to helping rural America seize the 

new opportunities? A first step is defining the goal for rural policy. 

A consensus is emerging on the importance of one goal—helping 

rural regions build new sources of competitive advantage. In a 

global economy, no imperative is greater. 

If this is the goal, two principles are likely to frame any new 

rural policy efforts. First, rural policies should shift from a traditional focus on sector to a greater emphasis on regions. One size 

no longer fits all. And second, rural policy must shift from relying 

on subsidies which thwart business innovation to public and private investment in new engines of growth. Agriculture and basic 

manufacturing will continue for the foreseeable future, but knowledge-based industries must become more important parts of the 

rural economy. 

10

Within this broad framework, what program directions might 

rural policy take? Four seem promising. 

First, spurring new regional partnerships: Policymakers may 

want to examine the possibility of providing new incentives for regional collaboration. Economic development funds might be made 

available to rural regions, but only if they clearly demonstrate a regional strategy. Such an approach has the advantage of encouraging each region to pursue its own unique niche. 

Second, growing more entrepreneurs: Our bank hosted a national 

conference on rural entrepreneurship earlier this year. Among 

other conclusions, we found that developing a more systematic approach to supporting the unique needs of rural entrepreneurs will 

be an extremely valuable program direction, as will understanding 

and forming a richer web of equity capital institutions. 

Third, boosting investment in research and technology: Many of 

rural America’s new economic engines will be built on innovations 

in research and technology. This raises new questions about the 

role of public policy in funding and developing such technologies as 

pharmaceutical crops and broadband. 

And fourth, redefining roles for higher education: If rural America is to become a knowledge-based economy, its institutions of 

higher learning will play a pivotal role. Land grant universities 

might take on several new roles, including new efforts to support 

rural entrepreneurs. Community colleges and regional universities 

could spark new development efforts in rural regions. 

In closing, a lot has changed since the Rural Development Act of 

1972. More and more rural regions are looking for new sources of 

competitive advantage. Fresh policy initiatives to help grow more 

rural entrepreneurs will be especially helpful in claiming a new 

frontier of rural opportunity. 

Thank you very much. 

Chairman MANZULLO. Thank you. 

[Mr. Drabenstott’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is Bernard Ungar, Director of Physical Infrastructure Issues at the U.S. General Accounting Office. 

And it was the original GAO report, Mr. Ungar, that, I think, 

was issued a couple of years ago that gave rise to the interest of 

this committee to see if the goals of Congress have been met. We 

look forward to your testimony. 

STATEMENT OF BERNARD L. UNGAR, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, U.S. GENERAL ACCOUNTING OFFICE 

Mr. UNGAR. Thank you, Mr. Chairman, and other members of 

the committee. We are pleased to be here today to assist the committee in addressing this issue of development of rural economy; 

and of course, I would like to focus on bricks and mortar for a few 

minutes and focus my summary on two issues. 

One is the impact of the Rural Development Act of 1972 on the 

location of Federal buildings in rural areas and the extent to which 

Federal employees who live in rural areas participated in telework. 

On the first issue, I think it is safe to say, based on the work that 

we did, which you cited in the report we issued a couple of years 

11

ago, plus a similar report that we issued back in 1990, that the 

Rural Development Act has not had a major impact on the siting 

of Federal facilities in rural areas. 

The act does require all executive branch agencies to give first 

priority to locating new and other Federal facilities in rural areas. 

However, what we have found over the last 13 years or so in the 

work that we have done is that most of the agencies in the Federal 

Government that have authority to acquire space, that we looked 

at, had not established policies and procedures as required by the 

act for siting Federal facilities or giving Federal facilities first priority in terms of rural areas. 

Secondly, we found very little evidence that agency personnel 

who are involved in the siting decisions actually did follow the act 

and adhered to its provisions or even considered rural areas in 

siting their facilities. 

Now, of course, in most cases an agency is going to site a facility 

where the mission or the requirements of the program being implemented require it, and that is going to often be in an urban area. 

But there are a number of situations and types of functions that 

could go in many different areas, such as data processing, accounting and so forth. So it is where agencies do have a choice where 

I think the act can have the greatest impact. 

Between 1989 and 2000, the proportion of Federal employees 

working in nonmetropolitan areas did not change significantly—

about 12 percent in both periods, indicating the act certainly hasn’t 

been a major driver there. And there are a number of factors there. 

One that affects this situation—one is that agencies really haven’t 

given a lot of emphasis obviously to this particular act. In fact, a 

number of the individuals whom we interviewed or got information 

from during our—we weren’t even aware of the act, so it hasn’t 

been widely known in a lot of areas. 

Also, another factor that may be at play here is that the rural 

development, that initially had a definition of ‘‘rural’’ for the purpose of this particular requirement, but that requirement basically 

was repealed, and the act currently has no definition of rural. So 

different agencies are using different definitions, and we will, in 

fact, recommend that GSA develop a specific definition, which it 

has done for its use, as well as a guide for other agencies which 

it doesn’t have authority over. 

Since our report, a number of steps have been taken. GSA did 

improve its guidance in connection with the implementation of this 

act, pretty much along the lines that we recommended. Congress 

has required the agencies’ inspectors general to review policies and 

procedures that agencies have established with respect to implementing the Rural Development Act, and actually issued a series 

of reports in 2002 and currently have a requirement the report, actually last month—we haven’t had a chance to look at those. So 

some action has been taken; obviously, more steps can be taken to 

strengthening the implementation of the act. 

And finally, just very briefly, on the availability of telework or 

the extent to which Federal employees participate in telework, 

OPM does publish statistics on that. The topic of Federal employee 

participation, unfortunately it doesn’t identify the extent to which 

12

rural employees are—or employees who live in rural areas participate. 

Two barriers that would—are in common with some of what the 

other speakers have mentioned are the availability of broadband 

technology to rural areas—this has affected, according to Federal 

agencies, one, the extent to which they can locate in certain rural 

areas that they choose to do so or would like to do so, and secondly, 

the extent to which Federal employees would be able to do telework 

or telecommuting. If they don’t have access to a high-speed Internet connection, which evidence indicates rural areas have less access to, that could be a problem. 

I would like to end my summary now and be available at the appropriate time for questions. 

Chairman MANZULLO. Well, thank you very much. 

[Mr. Ungar’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is David Freshwater 

from the University of Kentucky, and we look forward to your—I 

have never known anybody with the last name of Freshwater before, or for that matter, Drabenstott. You know, that is very interesting. 

If you could, pull your mike a little bit closer to you. And we look 

forward to your testimony. Thank you. 

STATEMENT OF DAVID FRESHWATER, PROFESSOR, DEPARTMENT OF AGRICULTURAL ECONOMICS, UNIVERSITY OF KENTUCKY 

Mr. FRESHWATER. Thank you. 

Mr. Chairman, Members of the Committee, thank you for the opportunity to testify this morning. My name is David Freshwater, 

and I am a professor in the Department of Agricultural Economics 

at the University of Kentucky where I teach and conduct research 

in the area of rural economic development. 

I will try not to be repetitive and move through my testimony 

fairly quickly. I think this is an important hearing, because the 

Small Business Committee deals with firms that play an especially 

important role in rural areas. 

Small businesses are important to all of America, but they are 

particularly important to rural America because of a certain number of conditions. They better fit the rural conditions in terms of 

matching demands for labor with the available quantity in small 

places. They have a stronger sense of attachment to local communities. They are much less likely to pick up and move offshore. 

They require loans of a size that local intermediaries can finance 

readily, and they provide more opportunities for forward and backwards linkages thereby creating additional employment than a lot 

of branch plants do. And this makes the creation of growth and the 

growth of small business even more important for rural America 

than it might be in urban areas where other factors are important. 

I try and make three points in my testimony. They are that manufacturing is crucial to most nonmetropolitan counties east of the 

Mississippi, but these counties are facing limited success with their 

old development model. Much of rural manufacturing, especially in 

the rural South, relied upon recruiting branch plants of domestic 

firms from larger urban centers. The advantages of the rural south 

13

were largely cost-related, and now foreign locations offer even 

lower costs that cannot be matched internally. 

While branch plants of foreign reform that require U.S. location 

are already a significant source of employment, notably the Japanese auto firms, we should not minimize the impact that foreign 

investment in rural America’s has had in the last 10 years, because 

it has created a vast number of jobs. It is more important to place 

attention on the relative role of small firms in rural areas, and that 

may include foreign enterprises. 

Last year a Brazilian company located a manufacturing plant in 

Campbellsville, Kentucky, so we are starting to see an inflow from 

developing countries of branch plants. That was 50 new manufacturing jobs, which isn’t a huge number by a large city standards, 

but in a town of 4,000, 50 new jobs has a significant impact. 

Small businesses face some important impediments in rural 

areas that are not as common either for small businesses in urban 

centers or for large branch plants. This means that it is important 

for the SBA and other Federal and State agencies that try to promote small business to recognize the distinct features of rural 

America if their programs are to be truly effective. These differences include a high proportion of low-skilled workers and related to this, often a relative lack of workers with specific types of 

advanced skills. 

In Pikesville in Kentucky we lost a furniture manufacturing 

plant that was recruited with EDA money because they couldn’t get 

the five to ten skilled furniture craftsmen that they needed in order 

to do the finish work, and thereby jobs for 75 or 80 low-to-moderate-skilled people went away. So it is not just low-skilled work 

that is important; it is important to make sure that you have a 

small complement of highly skilled workers who are necessary for 

those firms to be viable. 

Difficulty in getting access to markets outside the community for 

products and in developing supply chains, because physical distance and low density of economic activity are defining features of 

rural places, the Internet helps here, but it exposes those firms to 

competition as well. The Internet cuts both ways in rural America. 

It gives you a way out, but it allows other people to come in. And 

Amazon.com is sort of the classic example of doing in small book 

stores in rural areas. 

Rural areas point to their strong tradition and history, and that 

is an attractive feature. You listen to the Japanese car manufacturers, and they say they like going to rural America because you 

have got honest people and they work hard. But sometimes rural 

America is reluctant to embrace change; and I think one of the 

things that we have to do is try and convince small communities 

that their future is in change. 

More limited financial markets: Both in terms of the types of instruments that are available and the number of firms providing 

them, it is harder to arrange most forms of equity finance, subordinated debt and a whole lot of sophisticated financial instruments 

that in larger places are relatively common. 

Finally, Federal policy plays a critical role in influencing the 

competitive position of rural America, both relative to urban America and to foreign places. Rural America is both the least developed 

14

part of the industrialized portion of global economy and the most 

developed part of the developing portion of that global economy. 

Federal policy cuts both ways. 

For example, electricity deregulation promises to equalize electricity rates across the Nation. But low electricity rates were a critical factor in economic development in rural areas. Similarly, opening U.S. Markets to foreign goods has led to a loss of manufacturing jobs, but made consumers better off. 

We all know that there is far more to rural America than farming. But at present USDA is the only agency that has a clear rural 

mission. We also know that what gets measured is what gets done. 

If this committee used its oversight and authorizing capacity to encourage SBA to play a larger role in rural America, then additional 

support would be available to the small businesses and potential 

entrepreneurs that are being relied upon to improve incomes and 

the quality of life in small towns across the Nation. 

Thank you. 

Chairman MANZULLO. Well, thank you all for that excellent testimony. 

[Mr. Freshwater’s statement may be found in the appendix.] 

Chairman MANZULLO. Has anybody on the panel here ever appeared before a congressional committee? 

Okay. All right. I thought this was a unique experience, but I 

guess it is not. But one of the methods we use here is, if a question 

is asked and you have a staff member that really knows the answer and you want that staff member to scoot up to the table, introduce himself or herself and spell your last name for the record, 

you are welcome to do that. This is very informal. 

And we have—I have just got a couple of observations and one 

would be, you would think that the Department of Energy and the 

EPA would have a tremendous interest in keeping people in rural 

America. I mean, this city is a zoo. The PTO is opening up that 

those buildings on Eisenhower in Alexandria—I am not criticizing, 

but I think they are combining 17 or 18 or 19 buildings into one 

particular campus. And the observation that I have seen is that it 

is somehow not fair that all the economic growth in this country 

takes place in a relative handful of clusters, a handful of areas. 

Senator Byrd was successful in moving the FBI fingerprinting 

headquarters to West Virginia. But I—you know, if you want to 

save fuel, if you live in a small town, you can walk to work. If you 

want to keep the air clear, why spend all of our time and our 

money on—I mean, how big can the Washington area get? 

I remember when Disney World wanted to set up in Haymarket. 

I mean, that is all you would need is to have that type of activity 

completely jam the Beltway. And as I see more and more development taking place between Capitol Hill and Alexandria, where we 

live in a—when we are in session, in a three-story town house with 

a back yard that is so small that I can’t even have a dog out here. 

Everything that the Federal Government does somehow ends up 

being centered in Washington. 

What suggestions, techniques, developments, programs, ideas do 

you gentlemen have, first of all, to get the agencies to take a look 

at the purpose of the Rural Development Act, to encourage settling 

in rural areas? Whoever wants to answer that question. 

15

Mr. Ungar. 

Mr. UNGAR. Mr. Chairman, I can start. A couple of thoughts 

there. 

One is, perhaps the committee could assess the current Federal 

location policy and be a stimulus toward the development in the 

law of a more cohesive location policy for the Federal Government. 

Right now it is sort of fragmented. We have the Rural Development 

Act, which is quite clear and specific and is probably the major 

piece of legislation that affects specific siting decisions aside from 

the need to be competitive, which is a separate piece. 

There is an executive order that deals with locating Federal facilities in central business areas, when an urban area is desirable; 

and another executive order that deals with choosing historic districts, which is slanted toward, again, urban areas—more so, I 

think, than rural areas. But there is no kind of cohesive policy that 

identifies a whole number of factors that probably could be considered in terms of—in addition to mission and program requirements 

would be cost of real estate, cost of operation and any local incentives that might be available. Typically these are for the private 

sector, but there have been some situations where local areas or 

States have made incentives available for Federal agency, although 

they didn’t always look for that. So that is one thing that could certainly be done. 

Another possibility for the committee to consider is perhaps 

modifying a current requirement in appropriation acts that for the 

IGs—right now, the inspectors general are being required to report 

on just the policies and procedures that exist, not looking—they are 

not required to look at the actual implementation of those policies 

and procedures by agencies and carrying out the act, the Rural Development Act. So that might be another step the committee might 

want to look into. 

Mr. DORR. Mr. Chairman, I—in conjunction with Mr. Ungar’s observations that there needs to be a consistent policy, my observation would also be that it is a bit of a cultural issue, cultural from 

the standpoint that I would suggest maybe managers who are involved in siting these projects and these opportunities really 

haven’t had the opportunity to experience the depth and the 

breadth of capacity that exists in a lot of these regional areas. 

It has been commented that there is a shortfall of bandwidth in 

a lot of rural areas and, in fact, that is correct. But there are also 

an amazingly large number of rural areas that are expanding into 

wireless connectivity, doing some very innovative things, that my 

experience, albeit fairly brief in this position, would suggest that 

there are a number of areas that are very attractive that would be 

very accommodating to these sorts of things; and in fact, above and 

beyond what the Federal opportunities or government siting opportunities might be are actually doing some very innovative things in 

areas such as Minnesota, areas in rural California, a number of 

areas in Montana. There are more than enough out there that I 

think would be helpful if managers would have a chance to perhaps 

take some time to look at them and find out what is, in fact, available. 

Chairman MANZULLO. Mr. Drabenstott. 

16

Mr. DRABENSTOTT. Clearly, Federal policy can be a tool in directing the location of government facilities, and there are some very 

interesting examples from the rest of the world that offer some insight into this as a regional economic development strategy. 

Finland, for example, has done this very thing. 

But I think your question really raises a much more fundamental 

issue and that is, ‘‘What is the justification for Federal rural policy?’’ In the past, that justification has been almost entirely about 

food. It has been a social contract between urban consumers and 

rural food growers. Going forward, I think we really have to 

rethink that. And with a nation where 60 percent of the people, according to the 2000 census, now live in the suburbs, I think the 

question may become, ‘‘Do we want to avoid some of the costs of 

congestion in burgeoning metropolitan areas by encouraging economic opportunity in other parts of our landscape?’’ If that is the 

case, I would urge this committee and others to really engage that 

issue because, in my opinion, the new social contract between suburbia and rural America has not been fully debated and discussed 

in our Nation. 

We take for granted that food is a unique issue. But going forward, rural policy needs to be about more than food. 

And so the very issues that you raised Mr. Chairman, I think, 

are an awfully important backdrop as we think about the role of 

Federal rural policy, and on what basis we justify that policy intervention going forward. 

Chairman MANZULLO. Professor Freshwater. 

Mr. FRESHWATER. Yes, sir. I don’t want to sound critical in saying this, but I think a big part of it comes back to the Congress. 

There have been any number of rural development programs authorized in various farm bills going back through the 1970s. There 

have rarely been any appropriations to implement those programs. 

I think a second thing that is important for the Congress to recognize is that oversight has to come from more than just the Ag 

Committees. It has to come in particular from this committee, 

Commerce, and if I was going to suggest one thing that you could 

do that would make a huge difference, I think it is to build on what 

Secretary Dorr is saying about innovate—the ability to innovate is 

the crucial thing, I think, about creating something that looks like 

the Agriculture Extension Service for manufacturing on a comprehensive basis and do it in the same way that ag extension 

works. 

There is a three-way agreement between the states, counties and 

the Federal Government. But to do that, it is going to take the 

committees, the Commerce Committee and this committee, working 

together to take pieces of existing programs and put together an integrated structure. And then I think you would be able to see the 

same sort of success in innovation that has driven American agriculture applied to American manufacturing in some other places. 

Chairman MANZULLO. Mrs. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Drabenstott, in your testimony you talked about the lack of 

capital available to small businesses in rural America. And this 

Congress created an instrument to address that issue and that was 

the New Markets Venture Capital program. That was specifically 

17

designed to channel money into low-income and underserved rural 

areas. Yet this administration has continued to stall on implementing the New Markets initiative that was signed into law in 

the year 2000. 

If rural development is truly a goal of this President, do you believe that this administration should have a stronger commitment 

to the New Markets program? 

Mr. DRABENSTOTT. We believe that equity capital is probably the 

single biggest missing piece in rural financial markets and thus becomes especially important as we think about how we grow and finance entrepreneurs into the future. 

At our conference, that I referenced in my oral testimony and 

that is described in my written testimony, we devoted one session 

to this specific topic. The long and the short of that discussion is 

that there have been a wide range of equity capital programs tried 

in rural areas, some at the Federal level, some at the State level, 

some spawned by philanthropic initiatives. The real issue, I believe, is not pinpointing any particular one of these as the solution. 

Rather, I think the issue is how does public policy play a hand in 

creating a web of institutions that can provide access to equity capital to rural entrepreneurs, and on the other side of the fence, allow 

equity funds to pool their risk across geographic areas and across 

different types of businesses. 

That web of equity capital institutions just really isn’t there right 

now. I don’t think any particular program at the Federal level is 

going to solve that. What I would urge is an in-depth analysis, and 

examination of what it might take to create that web of equity capital institutions. 

Ms. VELAZQUEZ. But—excuse me, because you know I have just 

5 minutes to ask my question. But do you think that the New Markets venture capital could play a role? 

Mr. DRABENSTOTT. There is no question it could play a role. 

There are other programs that could as well. 

Ms. VELAZQUEZ. Okay. Thank you. 

Mr. Dorr, in 1999 you were quoted as saying that certain rural 

areas in Iowa had higher economic growth than others. You noted 

the correlation that, and I quote, ‘‘Areas that were not particularly 

diverse, at least not ethnically diverse, had higher growth rates.’’ 

these comments were at best racially insensitive, at worst bigotry. 

Given the fact that minority small businesses are the fastest 

growing sector of the economy, would you agree that we should be 

encouraging diversity? 

Mr. DORR. Absolutely. Those comments in no way reflect my view 

about diversity or about the value of diversity in this economy. 

They were a result of a day-and-a-half-long event designed to look 

at how to better utilize a gift that was given to the university; and 

it was in the context of that discussion that I made the observation 

that nonmetropolitan areas that were extremely successful in Iowa, 

which is a very nondiverse State, and if we were looking for success 

examples——[Interruption.] 

Mr. DORR [continuing]. Did not happen. 

Ms. VELAZQUEZ. Okay. I will accept your answer. 

So, given that you entered office under this cloud of doubt about 

your commitment to diversity, what have you done in your position 

18

to address these concerns by reaching out to minority businesses 

in rural communities? 

Mr. DORR. There are a number of initiatives that we are involved 

with. We have recently signed a collaborative agreement with HUD 

to work together in the colonias area to develop new and evolved 

programs in housing and water and waste infrastructure development programs. I have initiated a number of discussions with a 

former director of the Federal Reserve Bank, the economic research 

director, who is now moving to the University of Connecticut, 

which is the largest real estate—one of the most successful real estate academic programs in the country, to study how to do a better 

job of trying to build out a program that would facilitate the development of the unbanked, and those who have limited trust in the 

institutions that we use, that are necessary to develop equity capital and growth. 

One of the observations I have made, for example, in the Delta 

area is that there are absolutely minimal numbers of minority African-American appraisers, surveyors, title company owners, and 

there is a distrust in the infrastructure; and we are going to try 

to do something, if we can to figure out how, to rebuild that trust 

so that they can build a larger economic pie and a greater opportunities in those areas. 

We have a number of other initiatives going as well. 

Ms. VELAZQUEZ. Thank you. Do I have a chance for another question? 

Chairman MANZULLO. Yes. 

Ms. VELAZQUEZ. Mr. Dorr, in your testimony you noted that the 

2002 farm bill created a rural business investment program. This 

program provides for $44 million in grants and $280 million in loan 

guarantees. Struggling rural businesses are in desperate need of 

this money, yet it has been nearly 16 months since the farm bill 

was enacted into law and there has been no action. 

Mr. DORR. Well, the 16 months is as equally frustrating for me 

as it obviously is for you. There has been action. As a matter of 

fact, I believe the farm bill was signed on the 12th or 13th of May 

of 2002. On the 31st of May, based on the report language that was 

in the bill—we had already begun an initial contact with SBA, as 

was indicated in the report language, that they were the organization that we were expected to work with. 

We have been working with them aggressively since that period 

of time. We are having difficulty working things out, and in fact, 

yesterday I had a meeting with my staff, and we are going to make 

some alternate provisions if we have to. 

Ms. VELAZQUEZ. Do you have a timetable, if there are any problems that you can tell us about in working with SBA, that maybe 

the chairman and I can help you with? 

Mr. DORR. Yes. As a matter of fact, we have—I have talked personally with Director Barreto, others have visited with him. We are 

having some difficulty getting the economy act agreement put together that enables them to do it in the way in which we want. 

We presented it to them a number of times. We are waiting for 

their questions. We have gotten up to the table twice, and frankly, 

we have never been able to get questions back from them; and if 

we could get some assistance in that, I would be delighted. As a 

19

matter of fact, this morning I directed our legal counsel to look for 

other ways in which we could pursue this without the use of SBA, 

since there appeared to be some reluctance on their part. 

Chairman MANZULLO. Well, I—what I would suggest, Mr. Dorr, 

if you could set up an appointment with Mrs. Velazquez. 

Mr. DORR. I would be delighted. 

Chairman MANZULLO.—we will bring in someone from the SBA 

and force that agreement. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman MANZULLO. Thank you. 

Mr. King. 

Mr. KING. Thank you, Mr. Chairman. I would like to thank you 

and the ranking member for holding these hearings today. And this 

testimony has been extraordinarily interesting to me. 

Initially, I would like to address the issue that was raised by the 

ranking member with regard to those counties in Iowa that were 

referenced by Mr. Dorr. I represent both of those counties. That 

would be Carroll County and Sioux County. I grew up next door 

to Carroll County, and I have been in and out of Sioux County 

most of my life. 

Carroll County is a German Catholic county, and Sioux County 

is a Dutch Reformed county. Each of those counties has a unique 

culture that has developed there, and I believe that is what was 

referenced by Mr. Dorr. I think we need to be objective about our 

viewpoints here and not be intimidated by allegations of race being 

a factor. These are objective circumstances that were addressed by 

Mr. Dorr; and I will step underneath that cloud if there is one, Mr. 

Dorr. But I think that the people there have developed a culture 

that I would like to multiply across all of rural America and that 

is a culture that reinvests in its own community and has convinced 

their young people that grow up in these communities that their 

future lies there near where they grew up. 

I have in my lifetime watched a generation of young people move 

out of rural Iowa; these entrepreneurs have gone elsewhere to build 

and develop the economy around America. 

So I would direct my first question to Mr. Drabenstott, and that 

is, you made the comment that it will require legions of rural entrepreneurs in order to reverse this trend in our rural economy; 

and I absolutely agree with that statement. 

I have seen the legions make that exodus to other points of the 

globe, and how do we bring those legions back again and where do 

they come from? 

Mr. DRABENSTOTT. It is a great question, Congressman. I think 

there are two parts to the answer. 

First, I think we have to focus on economic opportunity and 

steering these entrepreneurs into the new rural economy where I 

think there are some significant opportunities. To do that we must 

recognize that forming a business in rural areas is just a different 

proposition than doing it in the suburbs. Accordingly, we would 

need a different way of supporting the needs of rural entrepreneurs. 

Second, I think we also need to give some attention to quality of 

life. The people who go off to college from rural areas frequently 

find lifestyle amenities in the suburbs that they may not find in 

20

the rural communities. How we offset that and think about innovative ways of improving the rural quality of life will be equally valuable going forward. 

Mr. KING. Thank you. And I know that is going to be a big 

project to try to make this shift, to get it turned back around. 

And you also made a remark about shifting the emphasis that 

now relies on subsidies. And if I look across this district that I represent, and it is the western third of Iowa—32 counties, essentially 

all of them rural counties, and the small towns, 286 towns, they 

are, you know, I have watched them board up the businesses on 

Main Street in town after town throughout my adult life. And I see 

those subsidy checks go to Florida and Arizona and other points. 

And when that happens, that wealth leaves the community as well. 

Could you make some remarks, your viewpoint on that, and go 

into a little more depth on the effect of subsidies? 

Mr. DRABENSTOTT. When you look at what has happened in rural 

America over the last half century, there have been two subsidies 

that have been especially large. One is agricultural subsidies. The 

other is industrial recruitment subsidies. It is hard to put a price 

tag on these subsidies, because, quite honestly, the numbers had 

never been collected. Nevertheless, my sense would be that it is a 

very large sum. 

In both cases what we are discovering is that in a globalizing 

economy, it is very difficult to build a rural economy on commodities, whether they be agricultural commodities or industrial commodities. So my view would be that it is time to think about redirecting our public focus away from purely making transfer payments or recruitment incentives, and, instead, growing more businesses, home-grown businesses that we can nurture within the 

local community through business development support, through 

equity capital, and other initiatives. 

Mr. KING. And what about the tax and regulatory structure that 

you find in rural America versus urban? Is there a distinction there 

that makes a difference? 

Mr. DRABENSTOTT. To be real honest, we haven’t taken an indepth look at that. Clearly, whether you are talking about a small 

business in rural areas or urban areas, regulations tend to be a 

higher proportionate burden for small businesses than large ones. 

So, because you have so many small businesses in rural places, I 

suspect it is a bigger burden. 

Mr. KING. And you haven’t looked at rural States versus urban 

States as to their tax structure. 

Mr. DRABENSTOTT. No, we have not. 

Mr. KING. That would be one thing I think might be instructive. 

And thank you very much. 

I direct, then, to Mr. Dorr, and I want to thank you for your testimony, and a fellow Iowan and western Iowan coming here today. 

And just to follow up on the question that I posed previously with 

regard to the impact of subsidies on rural America, did you make 

some comments on why it looks the way it does and how it might 

look if that began to move in the other direction? 

Mr. DORR. Well, I would refer back to Dr. Drabenstott’s earlier 

comments about policy in rural America, and it has become very 

apparent to me that, historically, as he alluded to, there has been 

21

a rural policy that has been focused on ag policy. It is becoming 

clear to me that that ag policy really directly impacts only about 

2 to 21⁄2 million rural Americans, but the number is kind of a moving number, but, depending on how you look at it, there may be 

as many as 65 to—our demographer at USDA would suggest 

maybe as many as 100,000,000 rural Americans in one definition 

or another. 

Our policies as rural policies are focused. Ag policies don’t deal 

with that. Our policies that have evolved in rural development are 

beginning to do that, and we are taking a much more holistic view 

that that is necessary. The outgrowth of the existing ag policy is 

that we have stifled—with the protection of the industry, we have 

stifled entrepreneurial activity. When you try to protect an industry, you generally end up killing it, and, so, quite frankly, I think 

that, by virtue of these efforts here as well as a number of others, 

people are beginning to look at the different kinds of policy options 

for this country as relates to rural America, and I am very optimistic, quite frankly. I think there are a lot of opportunities. I 

think it is going to be slow, but we are heading down the right 

path. 

Mr. KING. Thank you, Mr. Chair. 

Chairman MANZULLO. Mr. Ballance. 

Mr. BALLANCE. Thank you, Mr. Chairman. 

Mr. Dorr, I am sure you and the other panelists are aware I live 

in North Carolina, First District, and we used to have a lot of textile jobs. The last 7, 8 months, we have lost about 5,000, and in 

places like Roanoke Rapids, and in places like Henderson and Wilson and Bertie County, areas in my district, a lot of people who are 

out of work. 

This is also traditional farm area, and there are still some farmers in—farm workers, but a lot of these workers have been in these 

factories for 20 years, more, and now they are out of work. And 

what I am interested in is the USDA Rural Development has a 

great program, 2002 farm bill and even before for rural development. 

What do you have to offer—if you were sitting in Roanoke Rapids 

today and some of those workers were sitting around the room listening to you, what do you have to say that maybe you can put in 

place to cushion, not necessarily to solve, but these people are hurting. 

Mr. DORR. Well, let us say as soon as those announcements were 

made, Congressman Ballance, we were collaborating with our State 

director in North Carolina. We were aware of that. 

Mr. BALLANCE. Mr. Cooper. 

Mr. DORR. Mr. Cooper. 

Mr. BALLANCE. John Cooper. 

Mr. DORR. Right; and John is a remarkable State director, and 

he has been very concerned about this, as well as have we. 

The one thing that we can offer straightaway is forbearance on 

the direct family home loans, the single-family direct loans that we 

have made directly through our Rural Development programs. 

There is a mechanism in place that allows us to create forbearance 

in situations like this. 

22

We also have our business and industry loan programs that enable us to facilitate the guarantee of loans for businesses and enterprises in certain areas under certain circumstances when there 

are extenuating reasons to do so. We are also working with a number of other Federal agencies to see what the impact will be and 

what we can do in other respects. Obviously, one of our bigger concerns is we have a number of water and waste loans and utility infrastructure loans in those communities, and we are able to—in the 

event that it becomes an inability to service some of those operations, we are able to come in and provide some assistance in doing 

that so that the infrastructures are not allowed to deteriorate or 

fall apart during this time when there may be a shortfall of funds. 

Mr. BALLANCE. Mr. Freshwater, I guess I should jump to you, I 

guess. Obviously, apparently, our policies have to be to some degree 

reflected going back I don’t know how many years. We should have 

seen this coming, and maybe we have not yet. 

Are we on the right track, wrong track now in terms of our policies, our tax policies, trade policies? 

Mr. FRESHWATER. I think we are largely on the right track from 

a national perspective. What we haven’t done is realized or admitted in many ways that there are losers in this process that benefits 

the Nation as a whole from trade and the way we are going. 

It is hard for an economist to be against free trade, it is one of 

our basic beliefs, but I think Kentucky is in the same situation 

as—as your district, sir. We have lost thousands and tens of thousands of textile jobs over the last 20 years, and, for me, the real 

plight is you have got people who have small tobacco farms and 

textiles—and work in textile mills, and between those two things 

they have stitched together a reasonable living, and now both of 

those supports are going away. 

And the real question is what do you do with 40-to-50-year-olds 

that have 20 to 30 years of experience in the textile factory, no 

high school degree? They are highly unsuited for any of the retraining programs we thought about. They can’t move to urban areas 

because they have no skills that are particularly useful in urban 

areas. And the only conclusion I can come to is at least in the short 

run we have got to look for more low-wage, low-scale employment 

opportunities for them, recognizing that it is a transition, that we 

have to find ways to help those people because we can’t warehouse 

them. We can’t leave them out there hanging for 20 years, until 

they hit the Social Security age. 

Mr. BALLANCE. So we kind of missed that when we were making 

these earlier policies? 

Mr. DORR. I think so. I think we haven’t really thought about 

what to do with the people who lost, and one of the ways that I 

think you have to keep hope alive in America is by saying that 

when everybody benefits, or when we as a Nation benefit, that 

there has to be some help for the people who lose in that process, 

and try to think about programs that can provide that support. 

Mr. BALLANCE. I think my time is up. 

Chairman MANZULLO. Mr. Shuster. 

Mr. SHUSTER. Thank you, Mr. Chairman, and thank all of you 

for being here today. 

23

I come from rural Pennsylvania, and we are fortunate to be 

about—my district is actually about 30 miles from Pittsburgh and 

about 100 miles from Washington, D.C. And as I look now, we are 

losing jobs in rural Pennsylvania; Pennsylvania being an old industrial State, we have lost many, many manufacturing jobs, but as 

I look at knowledge-based industries growing, it seems to me they 

don’t have to be in Washington, D.C., or New York or Los Angeles. 

They can be pretty much anywhere. 

It is my thought, and I want you to maybe comment a little bit 

on this, whereas the last half of the 20th Century people migrated 

from rural and small towns to the cities, I think in a short period 

of time we should start seeing migration back the other way, because the knowledge-based industries, the cost to live—I don’t 

know how young people can afford to live in Washington, D.C., and 

New York City. 

In addition to that, when I look to the Southwest that has had 

such a great growth rate over the last decade, they don’t have the 

water, and in Pennsylvania and other northeastern States plenty 

of water to be able to support populations. So it is my view that 

we will start to see that trend going to cities reverse and go back 

the other way. 

I just wondered if you would comment on what your thoughts are 

and if you think that is—that is in the cards. Anybody can take it, 

and all of you, I would like you to make a comment on it. 

Mr. SAMPSON. I do believe we are beginning to see as a result 

of a number of factors, one of which is September 11, that there 

are companies that are beginning to look at the issue of how much 

concentration they have in urban areas, and there are significant 

opportunities that we are seeing in the economic development 

realm of firms moving not necessarily headquarters operations, but 

support operations to rural America where there is an abundance 

of available workers that have basically good skills. And, as Secretary Dorr mentioned, there are significant hubs out there in 

rural America where there is the kind of telecommunications infrastructure that can support those support and back-office operations, and I believe that we are already beginning to see that 

within the space of the last 2 years, largely for security reasons, 

as well as for cost reasons. 

Mr. SHUSTER. Secretary? 

Secretary Dorr? 

Mr. DORR. It is a great question. About 2 weeks ago, I took a little drive one Saturday up north to Middleburg and around and 

stopped at a farm station—or a farmer’s market stand on the way 

back. There was a handsome lad about 40 years old who had come 

to the community on a basketball scholarship, built his own dotcom company, ran it for 15 years, sold it 2 years ago because he 

wanted to get out of the rat race and wanted to farm. Well, he 

found out that farming wasn’t particularly as enlightening as he 

thought it was going to be, but he said, at least I can drive an old 

pickup without having to justify it. 

But he made the point, he said, you know, one of my problems 

was that my employees were having to drive 3 hours a day to and 

from work. They were having to live in homes that were four and 

five and six, seven and eight times more expensive than they were 

24

in other areas, and he said consequently all of this business is moving out of the country. He said, we are moving code writing and 

service work over to India and a number of others. I said, well, 

time out. I said, my home in Marcus, Iowa, that I probably couldn’t 

get $80,000 for, would probably bring three-quarters of a million 

out here. You could drive, as someone else said, to and from a position anywhere in 15 minutes. 

How do you mitigate that savings and overhead cost in doing 

business overseas when you have to deal with the political, the governance, the currency, and all the other issues? 

I think we clearly need to look at policies that stimulate this 

move in that direction. We are leaving a considerable amount of 

overhead money on the table by allowing these jobs to leave the 

country, when, in fact, we can mitigate these costs in rural areas. 

Mr. SHUSTER. What kind of policies would you see specifically? 

Mr. DORR. I would have to give that, I mean, more thought, quite 

frankly, but I think that is something that needs to be discussed 

in greater detail. 

Mr. SHUSTER. Yes, sir? 

Mr. UNGAR. Mr. Shuster, in relationship to Federal agencies and 

locations, I think the fact you mentioned could be very relevant 

here to perhaps a shift in direction, more emphasis on cost and 

making decisions. I think that would probably lean more toward 

rural areas. And this issue of security now is even far more important, obviously, at the Federal level as well as other levels, and 

rural areas do generally offer some advantages in that area in 

terms of set-backs and space and so forth. So I think those issues, 

along with, perhaps, some upward movement or pressure from local 

areas in terms of incentives to offer to Federal agencies, such as 

free land and things like that, reduced rates or whatever, might 

help get Federal agency managers to consider rural areas more. 

Chairman MANZULLO. Thank you. 

Mr. Case. 

Mr. CASE. Thank you, Mr. Chair. Thank you for the hearing. 

Mr. Dorr, first of all, you deserve some public recognition for answering your own phone last night about 9 o’clock. Thank you. And 

I thank you for the good work. 

And Mr. Sampson as well, thank you for coming out. 

You have two great people in Hawaii: Lorraine Shin and Gail 

Fujita. Lorraine, by the way, is headquartered in Hilo, which is exactly in compliance with the mandates of the law, and I think the 

message that is sent on that is not just what the law says about 

trying to provide some economic incentives, but the message is that 

the Federal Government cares about the rural communities; otherwise, I think most of the Federal Government would be kind of 

headquartered in downtown Honolulu, which is very urban and not 

in my district. So I am very interested in pushing it out. 

I think before we talk about how to help rural economies, we 

have to decide what rural is, and, Mr. Dorr, we have sent a letter 

to you that is exactly on point. In my own State, seven out of the 

eight islands are clearly rural and clearly need the kind of help and 

benefits that everybody here has talked about. Everything applies. 

The eighth island happens to be the island of Oahu, where the 

city of Honolulu is located, but actually that is a minority of that 

25

island. Most of that island is suburban and very rural. If I were 

to parachute you into someplace like Kahuku on that island, you 

would think you were coming right out of rural America, and yet 

the USDA has, perhaps out of a Federal Government one-size-fitsall look at the map and see the city and county of Honolulu on that 

island, decided that that is urban. 

I wrote you on July 9 and asked for a response on reclassifying 

rural areas of that island back to rural so we could be eligible for 

that aid. So, number one, I would just like to ask if you would respond to that soon; and second, again to make the point to all of 

the panelists that we have got to talk about what rural is. So, Mr. 

Dorr, if you could kindly get back to us on that, that would be appreciated. 

Mr. DORR. We will be delighted to do that. We have not overlooked that, we are working on that, and it does involve the definition of city and town; that is, as defined by the State. And it is 

somewhat complicated, particularly as a result of a couple of other 

changes within the 2002 farm bill, and we are working on it. And 

I apologize for having not at least informed you that we are addressing and attempting to work this out. 

Mr. CASE. Thank you very much. 

Chairman MANZULLO. Mr. Case, you have still got more time, 

but I would like to get to Dr. Christensen. Would you mind if we 

go to her, and then we can bounce back if we have more time, because the votes are coming. 

Mrs. CHRISTENSEN. Thank you. 

Chairman MANZULLO. I am sorry, Mr. Miller was before you. 

Why don’t we go with this: Why don’t you go with Mr. Miller, 

and then Dr. Christensen. If you would take 4 minutes apiece, I 

think we could finish it up. 

Mrs. CHRISTENSEN. I only have one question. 

Mr. MILLER. I am sorry. I was not complaining about the order 

at all, but the frequent case of our being interrupted every time we 

seem to get a head of steam up by having to traipse over to the 

floor for votes. 

First of all, I am not really from a rural area. My district is 

about one-third rural small-town North Carolina, but about twothirds urban/suburban. I represent Raleigh and Greensboro and 

Burlington, which are definitely considered urban in North Carolina, and I live inside the Beltline in Raleigh. I grew up in Fayetteville in North Carolina. That makes me a city boy, although, like 

most people, I am not that far from North Carolina. I am not that 

far from removed from the farm. My father was born in a farm outside of Rowland, North Carolina. You haven’t heard of Rowland? 

That is fine. Most people have not heard of Rowland either. 

However, I have spent a great deal of last month visiting the 

one-third of my district that is rural small-town North Carolina, 

and I think it is very much as Dr. Freshwater described. The unemployment rate is 10 percent or so. I have got the county by county back in my office, but Rockingham County, North Carolina, 

which is largely dependent on tobacco and textiles and furniture, 

their unemployment rate is 10.8 percent; percent in Caswell County is also hovering around 10 percent. 

26

The 10.8 percent does not reflect the job loss from the decorative 

bedding plant, the Pillowtex operation in Eden, with about 450 employees, or the closing of Stoneville Furniture in Stoneville, in 

Rockingham County, also 2- or 300 jobs in a county of about 

90,000. Adding to the difficulty is that about 45 percent of the 

adult population of Rockingham County does not have a high 

school diploma or a GED. It is about a similar number of persons 

in Caswell County, a little bit less because some of the employees 

in those counties really did require that their employees go back 

and get their GEDs and actually provided some of the training on 

their—at the workplace. 

Those workers are not going to become code writers. They have 

got a very difficult time, and even if the jobs are considered to be 

lost because of trade, in 2 years they are not going to go back, get 

their GED, and also learn skills for a new job. 

I have heard a lot of the discussion; in fact, some of the descriptions of farm living reminded me of reruns of Green Acres. It 

doesn’t really match up with the reality of what I have seen in 

rural North Carolina and how hard it is. A lot of the wonderful 

phrases I have heard talk about innovation, seizing opportunities, 

building new sources of competitive advantage, growing more entrepreneurs, building a knowledge-based economy, all those kind of 

obligatory phrases, but I just don’t see much going on to help make 

those things happen. 

Let me give two examples. One is community colleges. Probably 

nothing is more important, to use the economists’ phrase, to building human capital than the community colleges. That is where we 

match up skills to jobs. But the Bush administration has opposed 

eliminating the principal source of funding for vocational education, community colleges: the Carl Perkins grants. 

Second, Mr. Drabenstott, I think, spoke about the land grant universities. North Carolina State University, a land grant university 

in North Carolina, offers an industrial extension service which is 

funded through the Manufacturing Extension Partnership, which is 

part of NIST, the National Institute of Science—of Standards and 

Technology, which is part of the Commerce Department, and that 

provides services similar to ag extension to go to small businesses, 

provide them the advice, show them how to cut costs. If they have 

to deal with regulations, show them what the regulations are and 

how to deal with them. 

Chairman MANZULLO. Fifteen seconds. 

Mr. MILLER. The Bush administration has proposed cutting 

about 90 percent of the funding for that program. 

Mr. Freshwater, do those two cuts make any sense to you at all? 

Mr. FRESHWATER. No, sir. I think the Manufacturing Extension 

Partnership is a wonderful thing, but it doesn’t push, at least in 

the case of Kentucky, which is the one I know the most about——

. 

Chairman MANZULLO. I have got to cut you off. 

Dr. Christensen. 

Mrs. CHRISTENSEN. Thank you, Mr. Chairman. I just have really 

one question. And coming from the Virgin Islands, I often have to 

remind my colleagues that we are basically a rural area, sharing 

27

many of the problems and also the untapped potential of the stateside rural areas. 

My one question would be to Assistant Secretary Dorr. The 

USDA used to have a REAP program, the Rural Economic Area 

Partnership, and it seems to me that that kind of program, which 

was only utilized in one or two areas in the United States, would 

be—bring the kind of focus and collaboration that is needed to provide for economic development in our rural areas, but yet I don’t 

hear of it being revived. Is there any——. 

Mr. DORR. I believe last year there were two additional REAPs 

announced in the United States, one in, I believe, Maine, and one 

in Texas. I don’t know what the status is relevant to REAPs as 

they would impact the Virgin Islands, but we can check into that 

and get back to you on it. 

Mrs. CHRISTENSEN. So it is a program that is still ongoing. 

Mr. DORR. They are designated annually, and I quite honestly, 

I don’t know how that is done, and I will have to get back to you. 

Mrs. CHRISTENSEN. Do you have another question? That was my 

only question, unless someone else wanted to answer it from the 

panel. 

Chairman MANZULLO. Mr. Miller wanted an answer, and I believe I cut you off. 

Mrs. VELAZQUEZ. It is just fair. 

Mr. MILLER. Dr. Freshwater? 

Mr. FRESHWATER. It is an excellent program, but it hasn’t really—most of the SBA programs as well, they haven’t pushed into 

rural areas because people don’t know about them, they don’t have 

the personnel. So what you have got is a manufacturing extension 

program in Kentucky that works well in Lexington, works well in 

Louisville, works well in northern Kentucky, but does nothing outside the major metropolitan areas. 

Mr. MILLER. Would it make sense to expand the funding rather 

than cut it by 90 percent? 

Mr. DORR. I think expanding the funding and pushing into rural 

America would be a real excellent thing to do. 

Mr. MILLER. How about community colleges? 

Mr. DORR. And community colleges, as you said, are the basis for 

people upgrading their skills, and we have to do that. 

Mr. MILLER. Okay. One more question on the same topic? 

Chairman MANZULLO. We have got to go. 

Mr. MILLER. Okay. Never mind. 

My question was just to Mr. Sampson: What were you thinking? 

Mr. SAMPSON. With regard to what, sir? 

Mr. MILLER. The industrial extension services and community 

colleges, cutting both of those programs pretty dramatically. 

Mr. SAMPSON. The Manufacturing Extension Program is operated 

under the Technology Administration Program at the Department 

of Commerce, not the Economic Development Administration. I am 

afraid I was not involved in those decisions. I would be happy to 

have the appropriate person get back with you on that. 

Chairman MANZULLO. Okay. 

Thank you very much. We have got to go vote. Appreciate your 

time. 

[Whereupon, at 11:04 a.m., the committee was adjourned.]

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